The Coppock indicator of the Hang Seng Index sent out a long-term buy signal at the end of last month. Such a signal is rare and has proved to be fairly accurate over the years.
The Coppock Curve is a momentum indicator developed by economist Edwin Coppock. He introduced the indicator in Barron’s in October 1962, with the goal of identifying long-term buying opportunities.
When the indicator moves from negative to positive territory, that is considered a buy signal.
The indicator is compiled as a 10-month weighted moving average of the sum of a 14-month rate of change and an 11-month rate of change, after Coppock was told that that is the usual mourning period for people grieving the loss of their love ones.
He reckoned a downtrend was like a mourning period, so he used those figures.
How does the indicator work on the Hang Seng Index?
Since 1970, the Coppock Indicator has sent 11 buy signals, and there was only one in February 2002 that turned out to be a false alert.
It has been pretty reliable, although there are a few things we need to bear in mind when applying this indicator.
This is a long-term buying signal. Historical data showed the signal lasted two years on average, which means when the signal comes out, it does not necessarily suggest the stock market will go up within a short period.
In fact, the Hang Seng Index did show a temporary drop of 2 to 26 percent when the Coppock Indicator sent a buy signal in the past.
The indicator works relatively fine as a buying signal when it crosses into positive territory, but it has been less reliable when used a sell signal when it moves into negative territory.
Historically, the Hang Seng Index posted an average return of 73 percent if one entered the market following the buy signal and exited when there was a sell signal.
However, the benchmark lost 1 percent during the period after a buy signal came out in May 2009.
But the Hang Seng Index actually soared 31 percent at one point after the buy signal emerged, implying that the Coppock sell signal could come too late.
This article appeared in the Hong Kong Economic Journal on Aug. 3.
Translation by Julie Zhu
[Chinese version 中文版]
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